Weekly Market Overview | December 2, 2019

Peter A. Sorrentino, CFA

Rules for investing

In any market phase, there are ten rules for investing that are always in season.



Domestic Equity Overview
Market leadership rotated rapidly last week while continuing its recent ascent. While the shares of large domestic companies contained in the Russell 1000® Index and the Standard & Poor’s 500® Index added 1.2% during the abbreviated trading week, due to the Thanksgiving holiday, the gain paled in comparison to the 2.56% boost to the shares of small companies of the Russell 2000® Index.

  • Leading the broad equity market, with a gain of 2.5%, were the department store and specialty retailers of the Consumer Discretionary sector.
  • The specialty component and software companies led the Technology Sector to a 1.7% gain.
  • Specialty pharmaceutical stocks enjoyed stable buying for the week, pushing the Health Care sector up 1.61%.

International Equity Overview
The underlying value of the US Dollar was unchanged last week, and while this typically benefits the performance of emerging markets, last week it had no discernable impact. With the Thanksgiving holiday and little substantive news flow, the markets remained largely where they were the week before.

  • Emerging markets failed to extend their two-week run as the MSCI Emerging Market Index lost 0.81%.
  • Among the developed markets of Europe and Asia, there was enough strength in Western Europe to lift the MSCI EAFE® Index 0.49%.

US Fixed Income Overview

US Treasury yields regained some of the yield lost the previous week as the ten-year note started the week at 1.67%, gradually climbing to 1.81% by Friday’s close.

Commodity Overview

There was little cohesive price action among hard assets last week as demonstrated by West Texas Intermediate, which fell 5.82%. Gasoline declined 6.65% on the prospect of falling demand and rising supplies. Copper, the bellwether industrial metal, rose only 0.15%. Agricultural prices sung wildly with Spring Wheat up 7.56% while Soybeans lost 2.69%.
 

Top Ten Investing Rules always worth revisiting

In past commentaries, I’ve referred to the work of some of the great investors I’ve been fortunate enough either to have worked with or whose insights I have benefited from. One of them is Robert Farrell, who was widely followed and highly regarded during his time at Merrill Lynch and is spoken of reverently by Wall Street people to this day.

What follows here are Bob’s top-ten rules for investing. I reflect on this collective wisdom when the market feels as if it is in uncharted waters or moving rapidly but lacking purpose.

1.       Markets tend to return to the mean over time.

By "return to the mean," Farrell means that when stocks go too far in one direction, they come back. If that sounds elementary, remember that both euphoric and pessimistic markets can cloud people's heads.

2.       Excesses in one direction will lead to an opposite excess in the other direction.

Think of the market as a constant dieter who struggles to stay within a desired weight range but can't always hit the mark.

3.       There are no new eras -- excesses are never permanent.

This harkens to the first two rules. Many investors try to find the latest hot sector, and soon a fever builds that "this time it's different." Of course it never really is. When the sector cools, individual shareholders are usually among the last to know and are forced to sell at lower prices.

4.       Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

This is Farrell's way of saying that a popular sector can stay hot for a long while but will fall hard when a correction comes. Chinese stocks not long ago were market darlings posting parabolic gains, but investors who came late to the party have been sorry.

5.       The public buys the most at the top and the least at the bottom.

Sure, and if they didn't, contrarian-minded investors would have nothing to crow about. Accordingly, many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors head in the opposite direction.

6.       Fear and greed are stronger than long-term resolve.

Investors can be their own worst enemy, particularly when emotions take hold.

7.       Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

Markets and individual sectors can move in powerful waves that take all boats up or down in their wake. There's strength in numbers, Farrell observes, and such broad momentum is hard to stop. In these conditions you either lead, follow or get out of the way.

When momentum channels into a small number of stocks, it means that many worthy companies are being overlooked and investors essentially are crowding one side of the boat. That's what happened with the "Nifty 50" stocks of the early 1970s, when much of the U.S. market's gains came from the 50 biggest companies on the New York Stock Exchange. As their price-to-earnings ratios climbed to unsustainable levels, these "one-decision" stocks eventually sank.

8.       Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend.

All of these will tax the patience and character of investors.

9.       When all the experts and forecasts agree – something else is going to happen.

Going against the herd, as Farrell repeatedly suggests, can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10.  Bull markets are more fun than bear markets.

 



Market Stats 120219

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December 2, 2019
Peter A. Sorrentino, CFA, Senior Vice President and Chief Investment Officer of Comerica Asset Management Group

Peter A. Sorrentino, CFA

Senior Vice President and Chief Investment Officer, Comerica Asset Management Group

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